Investor Optimism Abounds Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) But Growth Is Lacking

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) as a stock to potentially avoid with its 40.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Zhejiang Wolwo Bio-Pharmaceutical's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Zhejiang Wolwo Bio-Pharmaceutical

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How Is Zhejiang Wolwo Bio-Pharmaceutical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Zhejiang Wolwo Bio-Pharmaceutical's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.2%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 22% per year over the next three years. With the market predicted to deliver 26% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Zhejiang Wolwo Bio-Pharmaceutical is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Zhejiang Wolwo Bio-Pharmaceutical's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhejiang Wolwo Bio-Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Zhejiang Wolwo Bio-Pharmaceutical that you should be aware of.

You might be able to find a better investment than Zhejiang Wolwo Bio-Pharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.